By Drazen Kozaric, Special Counsel – [SOURCE]
Recently, In BTI 2014 LLC v Sequana SA the Supreme Court in the UK considered a case on appeal and delivered a judgment in respect to directors’ duties to companies’ creditors.
BTI 2014 LLC is a company who was the claimant and appellant in this Court action. The second and the third respondents were directors of AWA, a companywhich,about 10 years before AWA was wound up, paid a dividend of 135,000 euros to the first respondent, Sequana SA, which was its only shareholder at the time.
The appellant argued that AWA’s directors’ decision to pay the above dividends breached their duties to the company’s creditors because there was a real risk that the company could become insolvent in the future. This was because at the time AWA had a potential future liability of an uncertain amount in relation to cleaning of a polluted river. The Court held that directors owed a duty to companies’ creditors to act in good faith and consider their interest. However, the Court concluded that a real risk of insolvency is not enough for this duty to arise. Consequently, it dismissed the appeal, because at the time when the dividends were paid the company was neither insolvent nor it was likely to become insolvent. Therefore, the directors’ duties will most likely arise if:
- The company is insolvent;
- The company is bordering on insolvency; or
- The company is likely to become insolvent.
The Court amongst other things considered Australian case law authorities.
Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 89 ACSR 1 (“Bell”) was an appeal which confirmed the previous judgment that the restructuring of the company’s financial arrangements, which limited the assets available to the company’s creditors, was a breach of the directors’ fiduciary duties. It held that the directors’ duties to act bona fide in the interests of the company and for proper purposes are fiduciary, thus extending the scope of duties owed by directors to their companies’ creditors. This was contrary to previous case authorities. Consequently, if a director fails to take into consideration a creditors’ interest when entering into financial arrangements or restructuring at the time the company is insolvent or bordering on insolvency, the director may be in breach of his or her fiduciary duty.
The above decision has been subject to criticism because some argue that it fails to take into consideration the nature of the business and the directors’ role within companies. Justice Carr in Bell noted though that if the directors acted honestly and reasonably they may not be in breach of their duties.
Whilst the above decision improved a creditors’ position, there is still no judicial clarity in relation to this issue in Australia because the issue has not yet been considered by the High Court.
To avoid potential breaches of their duties to creditors, directors should also consider the creditors’ interest in addition to its stakeholders. This is especially important when the company is insolvent, bordering on insolvency or likely to become insolvent. Therefore, directors should always be aware of their company’s financial situation and if the company is in a financial difficulty the creditors’ interest should be given more importance. If the company is insolvent its creditors’ interest will be given a priority.
- legal advice is obtained to support the directors’ decisions (and it should be);
- the advice can reasonably be relied upon (and is);
- it is later found creditors consequently suffered lossbecause of the directors’ decisions,
the directors can choose to waive legal professional privilege by using the advice to seek an order from the court excusing them from any breach of fiduciary duty to the creditors by reason of their reasonable reliance upon the advice.